tv Options Action CNBC November 9, 2019 6:00am-6:31am EST
happy friday "options action," fans we have a big show on deck here is what's coming up >> announcer: coming up tonight. >> mysteriously, the consumer discretionary sector has been failing to keep up with the broader market rally carter worth could solve the mystery. if it wasn't for you darn kids then. >> tilting sensation. >> no, not tilt. tlt, as in bonds and that strange sensation, that's dan nathan's bullish call he'll explain. plus --
>> disc o. >> if you are worried about the tech giant results next week, mike khouw has a place to run. it's time to risk less and make more "options action" starts now. before we dive into the show we've got breaking news on boeing and american airlines let's get to phil lebeau with more phil. >> and melissa a new date when american airlines will be returning the 737 max. remember it was january 16th they have now pushed it all the way back to march 5th. coming a come hours after southwest says it's pushing bab the return of the max to march 7th. once again airlines delaying when they expect to fly the plane again. >> phil, thank you phil lebeau with the latest on american airlines. well the markets may be sitting at record highs one sector showing weakness. look at the xly consumer discretionary etf. lagging behind the broad are the market and more than half of the stocks in the seccer now sitting in correction territory our chart master cart are worth says there could be more trouble ahead. why don't you head over to the
plasma, break it down. >> it's an instance of well, not acting well. to be fair, amazon is a full third of the weight of the sector and amazon itself is not acting well and it has a bit of auto correlation for the seccer overall but let's try to figure it out 64 stocks in totals. 2.8 trillion and those 64 stocks represent roughly 10% of the s&p. let's look at charts what i have here to start is the list of the top five names you can see them there and there is what i'm referring to azmodan being such a big weight. that being said, it's still a substre ob subsector as termed by standard and poors and does not act well and you'll see that in a few instances here there is the sector itself xly. and here is relative performance to the s&p and what we know of course is even as it is appreciating it is underperforming and basically at
or near 52-week lows in terms of opportunity costs or alpha other way to drou draw it, exact same kmart and you can see cheerily is we have consistently come to life of oh the line and now we have broken below that relative line and i think what's going to happen ultimately is we break on absolute basis as well one more chart no drawings, no lines. i think you can draw it this way. a lot of tension here. my hunch is this is going to get resolved that way rather than up and note, it hasn't made a high since july, as the stock market makes more and more highs. poor performer. >> as carter mosties back to the desk mike what's your trade. >> xly as he pointed out obviously there is a handful of stocks that basically represent an outsized portion of the consumer discretionary sector index and the etf tracking it. xly, namely amazon you know, amazon, we are coming
into a hot season for amazon home depot is a name i like. starbucks is a name i like mcdonald's obviously had idiosyncratic stuff going on this week. generally these are names i like but overall the market doesn't particularly like them i was looking at putting on a put spread in the name now normally when i look at put spreads one of the reasons we do that is because options price the might be elevated. they're not in the case of xly right now the three month at the money implied volatility is 14.5%. which doesn't tell you much but the longer term average is 16.2. so it's below. but xly because it represents an index there isn't the opportunity really for big price jumps to the downside. that's one of the reasons i think us using a put spread makes sense. looking to jrn, the $8 put spread sell the lower strike for $1 $2 25% of the distance between the strikes.
we're taking what are relatively low cost options as it currently stands and making them lower one of the things we have to recognize is that the market has actually been behaving lately with very low raemzed volatility it just seems like each and every day if we have any kind of a price jump it seems strangely enough to be the to upside talking to guy about this before the show over the course of the last month we have eight days gapping high are on the open i find this an extraordinary period in the market when i look at it. but if you make a bearish bet this is the way to do it. >> what i think is interesting about the xly, mike just said the option prices are trading well below average over the last year or so and what's interesting when you think about the names that carter put up there that make up maybe 40% of the weigh, amazon, home depot and then mcdonald's what's interesting about mcdonald's is we have just seen mcdonald's rollover. a stock trading at premium multiple, expensive to peers and to the market and sold off 15% from those highs
home depot could set up like that, report a good the print and sell off a bit and azmodan like you said is 10% below the highs. if you want to play that in consumer discretionary, the xly is the best which to do it and mike's spread where he pays a quarter of the which had south a great way to do it between now and january >> when a stock sells off it doesn't have to be for any other reason people decide to stop buying mcdonald's is a 5% grower that's all it does. but it crops 15% starbucks lost 20% of the vam. it did anything change value is not value change it's timing as with home depot it can happen a second. >> xly closed the the day above 121 that's the strike of the put we are buying and spending $2. the downside break even is 119, down $2.34 on $120 instrument. from where we close today. that's essentially 2%. this thing would have to move down 2% between now and the third friday in january for this
thing to be essentially past the break even point what is the probability of that? i think that's one of the amazing things in the options market right now is it's remarkably complacent. tell us almost no risk of this happening. i happen to disagree with that >> does that make you suspicious >> it does -- well it does make me suspicious. but i will say this. you know, look, we were also talking about this i have some spx put spreads on put a couple more ndx sput spreads on close of day last 30 minutes pu i am fighting the tape i'm willing to admit that you know you can have a period where the market is basically tracking higher and we've had periods longer than the one we're in where the mechanic steadily marched from the lower left to the upper right and may continue to do that but i'm anxious admittedly. >> and things overshoot.
think about december what was the reason to have a 27% collapse in the rustling 2000 from october to december where the s&p dropping almost 20 can you overshoot to the downside and to your point you could tick higher. but at some point the extremes are reconciled. >> moving on here while the consumer trade may start to crumble, bonds are having a breakdown. treasury yields soaring 2% for the first time since july on the back of a potential deal between u.s. and chf to roll back tariffs. sending bond prices tumbling to the lowest levels in two months. but if you think the yield yo yo has tom too far too fast don mass a way to play the bounce. >> look at the i shares. tlt, 20-year treasury etf we were talking about implied volatility of price of options is generally clean in an instrument like that
bup we have seen volatility in interest rates the big story on wall street this week was that move up in yields we saw the 10-year u.s. treasury yield bounce back to the breakdown level. i think the breakdown level is important there just below 2% because that's when the fed just cut interest rates for the first time is july 31st in 10 years. then we saw the move lower part of the move lower down to 1.45 in treasury yield had to do with concerns about global growth, and trade. all the issues -- throw in brexit they seem to have abated in the last few weeks now we've had a move back in rates. if you are watching carter's chart work before he thifrpgt we might see resistance there maybe they get to 220, 221 whatever it takes. you could be a sell there are. with you let's look at the tlt, the instrument in which i would play a rate decline here because i look to benefit from bonds going higher look at that intersection between the breakout level from the summer at 1.35 in the tlt and the uptrend in place since the december lows. we got there today 1.35
that was the level here. if you are thinking about being contrarian and saying, you know, i think rates have gone too far too fast and i want to look into 2020 where everybody is really positioned bullishly here now with a lot of complacency as you mentioned this is a great contrarian trade largely because the pris of options -- that chart there -- you see there is an uptrend there and they're much higher earlier in the year but when the price of options and tlt go up they've been going up when the tlt go up often when you see stocks go down you see implied volatility people reaching for the options go pup to me prices look tell rival cheap. i want to spread it out. i want to look to march expiration when the tlt was trading at 1.35. you could buy the march 1.351.50 call sfred paying $3.50 boying one of the march 135 at the money calls for $4 selling one of the march 150 calls at 50 cents. costs you 3.50 that's the max
risk 2.% of the etf price breaks even at 138.50 up 2.5% on march expiration and make up to 11.50. why am i targeting that mike says why are you selling that call that was basically the high earlier this year. i just like the risk reward of this trade risking 3.50 to make 11.50 oef the next four months if it's up about 11%. >> you smunt put words in my mouth expecting what i'm saying next i want true when options prices are low i'll say why are we selling the cheaper option however in this cases actually -- it's not a naked option he is selling it makes a big difference. if you are selling a put for a dollar on a $100 stock that's a different situation than selling the same put for a dollar but my buying highering strike put for two.
the way to think about the premium you sell is in the context of the preem upi about when we look at it that way. i can clearly woo see why you draw the line in the sand at 150. that makes sense do i think it's imperative to sell the 50 cent call not necessarily but i don't see any likelihood it's breaking through the level either so it's probably found money. >> you know where i stand. >> yes. >> we discussed this whether you do the tlt or underlying bond in chicago. but the point is that things do overshoot. we get collapse, end of world at 145 now all of a sudden we go the other way. come a little too far you bet against it i think. >> last word, dan. >> i just think this is an interesting setup because vol is cheap. the options look dollar cheap if you look for a hedge in bullish equity environment this is about as cheap as it gets. and we have a lot of time to march expiration. >> for everything "options action" check out the webt "options action".com and check out the supercool news letter. here is what's coming up next. >> announcer: coming up, cisco systems out with earnings next week mike has a systematic way to prepare for them, especially if
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check our shares of cisco the stock lagging the rest of tech up just 12% since january down more than 15% since the 52 high pressure week highs one of the traders looks at a catch-up play for when they report next week mike at the plasma with the call to action. >> i'm not 100% whether i think about it as a catch-up play as a way where you can have a modestly neutral to bullish bet in a stock that hasn't been behaving well lately obviously we identified a catalyst that's in the form of earnings we have also probably identified one of the reasons why the stock hasn't done particularly well. and that is that cisco happens to rely heavily on enterprise spending we spent, you know, part of the last couple of minutes talking about discretionary spending but enterprise spending is an area where this if there is glebl macrouncertainty we are likely to see weak pending one of the things we also see in catalyst is shorter dated options tend to be expensive liking to sell those if we can if we look at the price kmart cisco year to date one of the things we see is how this has grossly underperformed the market of late i mean, this is of an area -- we were looking at this earlier about if you look at the october lees in the s&p alone it's up about 7% from the lows in that first week
this obviously even though it's had a bounce lately is certainly underperforming the market over a similar time frame so the trade we were looking at was the november/january 50 cull call calendar. buying the longer dated january calls and then selling the november 50 calls for 5 a cents. net-net, you spent 70 cents to put on this trade. the idea is that you profit in in region right in here. i just want to talk quickly about whether it makes sense to sell a call for 55 cents here is one way to think about it this call is going to expire in two weeks. right now it represents about 1% of the current stock price if you think about selling options, sometimes a good way to think about it is how much am i collecting as a percentage of the current price and over what time frame
this is actually quite a lot when you consider that we're dealing with a relatively short period to expiration of course you are covered by the longer dated call. if the stock lands in this region you'll have the opportunity potentially to go ahead and sell a december call against it as well the idea here is that we are not expecting anything too spectacular. the markets implying about a 5% move that's in line with what the stock typically has done but we also know one of the reasons why it might not be that spectacular. and the answer to that question is enterprise spending. >> dan, what do you think. >> i like the trade idea i think carter will talk to 50 there is gaps in the chart over the last few months or so and have to do with earnings guidance one of the reasons the stock underperformed was because the guidance they gave in early august came out of left field. if you think they put a good enough quarter up and the stock is range bound this is a way to do it and mike is lagging into a
bullish trade getting by the short dated short strikes. to me i like it but also think that if you think their guidance is about to get better then you want to own this thing on the way back to 55. >> i mean, i think that's just it it is sort of range bound, right? and sometimes range bound persists longer nan is wanted or hoped for. my hufrmg is is it stays in the range and you won't get something quite enough to make it worthwhile. but that's why you got to do it with options rather than just sitting herebying the stock and getting stuck in a dr. minkant position. >> the most common first options trade for people first getting into this is they own stocks and then they will sell calls against them or by a stock and sell calls against it. so that would be a buy right in this case. buy cisco and selling as the 5 a cent call. would i do that here no i don't think so. and the reason is then you have the exposure to the downside significantly greater than the 70 cents you're trying to thread the
needle a little bit. but trying to get the favorable of the buy right or the covered right without the exposure you get if things turn out more disappointing and you get the negative guidance. we got a move of almost 9% to the downside 9% of a $50 stock is considerably more. $4.50 than the 70 cents we spend. >> one big unicorn locked in lows after the lock up expiration what that means for one of our traders. it's friday. tweet us your burning questions at "options action" and you might get the answer on air. "mad money" we should note big note, cramer pays tribute to our veterans. >> amazing show. keep it going. "mad money" drops in at 6:00 ♪ ♪ ♪
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♪ ♪ ♪ ♪ welcome back to "options action." time to look back at a couple of open trades. last week dan said it might be time to get long disney ahead of the earnings and the launch of the streaming service disney plus >> i think this is a name as you head into 2020 that you want long exposure for. once investors are able to model out what subscriber growth looks like and the profitability of this business could look like as they get to tens of millions of subscribers. i think the stock impose higher today when trading 132.5 you
could try the 120/140. richk reers selling at 1.20. buying one of january 140 calls at 2.20. >> dan wearing a tie that day all business and a successful trade. disney is up about 6% since then what are you doing. >> i think if you like the idea last week, you like it more this we can the stock had a nice pop, above 140 in the premarket closed at 138ish or so here is how you manage the trade. short a january 120 ht put put covered that sold at 1.20 afford the 50 cents you take that risk off the table now left long a january 140 call and there is a lot of things you could think about doing there. you could spread it turn it into vertical call spread sell the january 145 call or january 150 call and waistically a call spread on for free that gives you a couple of months now of exposure and a pretty wide range to the upside.
>> next up, mike laid out a way to lock in gains into uber's lock up expiration >> you could create pressure on the stock from insider selling you could create support from short covering so those two things might actually mean that the stock could move less than a lot of people seem to be anticipating here you could spend $3.10 to buy the january calls, sell the ones that expire in one week for a dollar 80. a net outlay of $1.30. >> uber has plunged about 13% since then hitting new all-time lows along the way. what do you do, mike. >> first things first, the option that we sold is now clearly worthless. actually earlier we saw that this trade was worth about $1.20. it's worth considerably less if but urine cliend to be longer uber any way it's only options you want to do that i may look to sell near dated stuff against it because i don't think things are turning
around for the name any time soon. >> what does that chart look look like to you. >> not inclined. >> is it just -- is it dead, fallow we have thought -- when you come out of the the gate and the first day is the pest day that's what this is in life that's a still born. not good making new lows. something wrong. don't do it. >> up next, the tweets and the final call >> announcer: "options action" sponsored by think or swim by td ameritrade and a trade desk full of experts, available to answer your toughest questions. and i see it with zero commissions on online trades. i like what you're seeing. it's beautiful, isn't it? yeah. td ameritrade now offers zero commissions on online trades. ♪
jj, will you break it down for this gentleman? hey, ian. you know, at td ameritrade, we can walk you through your options trades step by step until you're comfortable. i could be up for that. that's taking options trading from wall st. to main st. hey guys, wanna play some pool? eh, i'm not really a pool guy. what's the hesitation? it's just complicated. step-by-step options trading support from td ameritrade welcome back time to take tweets. one fan asks if it's better to buy a call in viacom or cvs ahead of earnings next week. >> i would say the options premiums of both names seem elevated i'd be more inclined to use call spreads or risk reversals. >> they're identical so bad they're good either one. >> last from the options pits carter braxton worth.
>> i'm worried by looking at cisco into earnings. >> daniel. >> tlt as a tough spot but at the tough li is spot for a contrarian trade. >> that's does it for "options action." see you back here next friday. don't go anywhere special edition, aluting our veterans. "mad money" starts right now - [narrator] the following program is a paid advertisement for the nuwave bravo xl sponsored by nuwave, live well for less. is all the clutter in your kitchen starting to look like an old junkyard? sick of spending hours cooking, only to serve mediocre meals lacking in flavor? wish your family would spend less time whining and more time dining? well, now they can! with the new bravo xl, the world's first digital smart oven with flavor infusion technology. it's a breakthrough in culinary creations! coming up next, you'll see how bravo's compact design cooks large family meals in record time! how, with just a touch it can bake, roast, grill,